EPFO likely to raise interest rate on retirement savings to 8.50% for 2012-2013

NEW DELHI: The retirement savings of over six crore formal sector workers are likely to fetch a dividend of 8.5% for 2012-13 - marking a marginal increase from the 8.25% paid on employees' provident fund (EPF) savings last year.

The Central Board of Trustees of the Employees' Provident Fund Organisation (EPFO) is expected to ratify the proposed EPF rate on February 25, after the board's finance and investment committee refused to discuss the proposed rate at its meeting on Friday. Committee members told ET that they told senior PF officials to take the interest rate proposal to the Board since the underlying income estimates were not shared with them prior to the meeting.

The panel, however, cleared a proposal to liberalise investment norms for private sector bonds. Though EPFO can invest upto 10% of its fresh inflows into such corporate bonds, it had put onerous restrictions on the companies that can qualify for investments. These conditions include a minimum 26% shareholding by a public sector company — a norm only a handful of firms can meet.

The finance committee has agreed to do away with some of the restrictions and allow investments in bonds issued by any company that has a net worth of at least Rs 3,000 crore and has been paying a dividend of at least 15% for the previous five years. The board will now have to take a call on whether a cap must be imposed on the foreign shareholding level of companies whose bonds could be considered for investments.

Though EPFO expects to earn a net income of Rs 21,147 crore in 2012-13 on its Rs 263,000 crore corpus of PF savings, it has earmarked Rs 350 crore from this income to update PF accounts for previous years. There are 38 lakh accounts that haven't been updated till 2010-11 . The EPFO has stated that 8.5% is a 'feasible' PF rate for this year as any rate above that would lead to a deficit.